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Why Have Shares Of United Overseas Bank Ltd Gained 42% In Value In The Last 5 Years?

I think it is fair to say that most investors want to find stocks that can increase in value in the future, either from an appreciation in the share price or through the distribution of dividends.

So, it’s worth keeping in mind the idea that both factors – price appreciation and dividends – are generally derived from the same source, a company’s profit.

This profit is, in turn, driven by a company’s business performance. In general, companies with strong businesses exhibit sustainable growth, high margins, high returns on equity, and low leverage (leverage is a gauge of how much financial risk a company’s taking on).

In here, I want to take a look at the business performance of real estate developer and investor United Overseas Bank Ltd (SGX: U11) over its last five fiscal years. I also want to track the total return of its stock; the total return factors in the gains from dividends.

Here’s a table showing United Overseas Bank’s revenue, net profit, net profit margin, return on equity, and leverage:

UOB financial numbers table
Source: United Overseas Bank’s annual report

From 2011 to 2015, the bank’s revenue and net profit have both grown steadily and they have increased by a total of 41% and 38%, respectively. United Overseas Bank’s net profit margin has also remained steady at between 39.9% and 44.8%.

Moreover, the bank’s return on equity has come in within a tight range of 11% to 12%. The return on equity measures a company’s ability to generate a profit from the shareholder’s capital it has; in general, the higher it is, the better it could be. But, it’s also worth noting that the return on equity can be inflated through the use of higher borrowings. This brings me to United Overseas Bank’s leverage.

As it turns out, United Overseas Bank’s leverage has not changed much either from 2011 to 2015. This shows that the bank achieved its stable return on equity without having to take on more financial risk.

Over the five years ended 3 February 2017, United Overseas Bank’s stock has risen by just 16.8% in price. But when dividends are factored in, the bank’s total return jumps to 42%. The experience of United Overseas Bank is a good reminder of two things in investing: (1) A stock’s performance over the long-term is linked to how well or poorly its business does; and (2) dividends can be an important component of a stock’s return over the long term.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of United Overseas Bank. Motley Fool Singapore contributor Lawrence Nga doesn’t own shares in any companies mentioned.